Essays in information economics

This dissertation consists of three essays that study information economics and mechanism design with limited transfers and externalities. In the first chapter, “Incentive Agents through Ratings,” I study the optimal design of ratings to motivate agent investment in quality when transfers are unavailable. The principal designs a rating scheme that maps the agent’s quality to a (possibly stochastic) score. The agent has private information about his ability, which determines his cost of investment, and chooses the quality level. The market observes the score and offers a wage equal to the agent’s expected quality. For example, a school incentivizes learning through a grading policy that discloses the student’s quality to the job market. When restricted to deterministic ratings, I provide necessary and sufficient conditions for the optimality of simple pass/fail tests and lower censorship. In particular, when the principal’s objective is expected quality, pass/fail tests are optimal if the agent’s ability distribution is concentrated towards the top, while lower censorship is optimal if the ability distribution is concentrated towards the mode. The results generalize existing results in optimal delegation with voluntary participation, as pass/fail tests (lower censorship) correspond to take-it-or-leave-it offers (threshold delegation). Additionally, I provide sufficient conditions for deterministic ratings to remain optimal when stochastic ratings are allowed. In the second chapter, “Allocating Positional Goods: A Mechanism Design Approach,” I study the optimal allocation of positional goods with externalities and one-sided transfers. Because consumers care about their relative positions in consumption, allocating an item to one buyer has externalities on others. Using a mechanism design approach, I characterize the externalities by a feasibility condition. I show that the revenue-maximizing mechanism possibly excludes some buyers and fully separates the participants if buyers’ type distribution satisfies Myerson’s regularity. The seller can guarantee at least half the maximum revenue by offering a single level of positional goods. As the seller offers more positional good levels, the consumer surplus decreases (increases) if the distribution has an increasing (decreasing) failure rate, and exclusion always harms consumers. Applications include luxury goods, priority services, education, and organizational design. In the third chapter, “Optimal Quality Certification under Moral Hazard,” I extend the model in the first chapter to incorporate a flat certification fee and study how the certifier designs and prices quality certification when the agent’s quality is endogenous. I show that the revenue-maximizing certification is a noisy test that fully reveals quality with some probability and outputs the same signal (e.g., pass) for every participant otherwise. For a regulatory certifier who maximizes a weighted sum of the certification fee and the agent payoff, a noisy test remains optimal if she cares more about the former. In this case, agents underinvest in quality. Additionally, when stochastic ratings are infeasible, a pass/fail test is revenue-maximizing.

Author dc:creator

• Xiao, Peiran

Advisor dc:contributor.advisor

• Lipman, Barton L.

• Economic theory

Statement dc:rights

• Attribution-NonCommercial 4.0 International

Licence dc:rights.uri

• http://creativecommons.org/licenses/by-nc/4.0/

Language dc:language.iso

en_US

Handle dc:identifier.uri

https://hdl.handle.net/2144/53392

OAI record oai:identifier

https://open.bu.edu/oai/request?verb=GetRecord&metadataPrefix=dim&identifier=oai%3Aopen.bu.edu%3A2144%2F53392